JD Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938)

8/17/2019 JD Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938)

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304 U.S. 307

58 S.Ct. 913

82 L.Ed. 1365

J. D. ADAMS MFG. CO.

v.STOREN, Chief Administrative Officer of Treasury, et al.

No. 641.

Argued March 30, 31, 1938.

Decided May 16, 1938.

Messrs. Frederick E. Matson and Harry T. Ice, both of Indianapolis, Ind.,

for appellant.

Messrs. A. J. Stevenson, Asst. Atty. Gen., and Joseph P. McNamara,

Deputy Atty. Gen., for appellees.

Mr. Justice ROBERTS delivered the opinion of the Court.

1 In this case we are called upon to determine whether the Indiana Gross Income

Tax Act of 1933,1 as construed and applied, burdens interstate commerce and

impairs the obligation of contract in contravention of article 1, sections 8 and

10, of the Constitutio o f the United States.

2 Section 1 declares that the phrase 'gross income' as used in the Act means, inter

alia, gross receipts derived from trades, businesses, or commerce, and receiptsfrom investment of capital, including interest. Section 2 imposes a tax

ascertained by the application of specified rates to the gross income of every

resident of the State and the gross income of every nonresident derived from

sources within the State. Section 6 exempts 'So much of such gross income as

is derived from business conducted in commerce between this state and other

states of the United States, or between this state and foreign countries, to the

extent to which the State of Indiana is prohibited from taxing under the

Constitution of the United States of America.'

3 The appellant, an Indiana corporation, manufactures road machinery and

equipment and maintains its home office, principal place of business, and


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factory in the State. It sells 80 per cent. of its products to customers in other

states and foreign countries upon orders taken subject to approval at the home

office. Shipments are made from the factory and payments are remitted to the

home office. Pursuant to a practice of investing surplus funds not immediately

required in its business, the appellant owns and receives interest upon bonds

and notes of Indiana municipal corporations which, at the time they were

issued, were declared by statute to be exempt from taxation.

4 Upon the adoption of the Act, the appellant filed a petition in a State circuit

court in which, after reciting these facts, it alleged that the appellees were

demanding that it report and pay taxes upon income received in interstate and

foreign commerce and income received as interest upon securities exempted

from taxation by the State law and that these demands, together with penalties

specified in the statute for failure to make return and pay the tax, would be

enforced unless prevented by the judgment of the court. The prayer was for adeclaratory judgment that the Act, as construed and applied by the appellees, is

unconstitutional. After issue joined the facts were stipulated and the court made

findings and entered a judgment in favor of the appellant. The Supreme Court

of Indiana reversed the judgment holding that the tax demanded does not

unconstitutionally burden the interstate commerce in which appellant is

engaged and does not impair the obligation of any contract of the State

exempting municipal securities from taxation.2

5 1. Will the threatened imposition of the tax on the gross income from the

appellant's sales in interstate commerce contravene article 1, section 8, of the

Constitution, which reposes in Congress power to regulate interstate and

foreign commerce?

6 The title of the Act declares that it is a revenue measure imposing a tax upon

'the receipt of gross income.' The statute defines gross income as meaning the

gross receipts derived from trades, businesses, or commerce. The SupremeCourt of Indiana in its opinion states: 'The statute here under consideration

levies a tax upon all who are domiciled within the state, based upon the

privilege of domicile, and transacting business, and receiving gross income,

within the state, and measured by the amount of gross income.'3

7 The tax is not an excise for the privilege of domicile alone, since it is levied

upon the gross income of nonresidents from sources within the State. Nor is it

for the transaction of business since in many instances it hits the receipt of

income by one who conducts no business. It is not a charter fee or a franchise

fee measured by the value of goods manufactured or the amount of sales such

as the State would be competent to demand from domestic or foreign


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corporations for the privilege conferred.4 It is not an excise upon the privieg e

of producing or manufacturing within the State, measured by volume of

production or the amount of sales.5 It is not a tax in lieu of ad valorem taxes

upon property, which would be inoffensive to the commerce clause,6 since the

appellant pays local and state taxes upon its property within the State and it

appears that these, as respects appellant and others similarly situated, have not

been reduced. The Act, moreover, is silent as to the tax being in lieu of propertytaxes. The opinion of the Supreme Court suggests that the statute was adopted

as part of a scheme for the reduction of local property taxes and the substitution

of a gross income tax but, as appellant points out, provision for reduction of

property taxes was made by legislation passed in 1932.7

8 The regulations issued by the Department of the Treasury, pursuant to authority

granted by the Act, treat the exaction as a gross receipts tax;8 and the Attorney

General says in his brief that it is a privilege tax upon the receipt of grossincome. We think this a correct description.

9 We conclude that the tax is what it purports to be—a tax upon gross receipts

from commerce. Appellant's sales to customers in other states and abroad are

interstate and foreign commerce. The Act, as construed, imposes a tax of one

per cent. on every dollar received from these sales.

10 The vice of the statute as applied to receipts from interstate sales is that the tax

includes in its measure, without apportionment, receipts derived from activities

in interstate commerce; and that the exaction is of such a character that if

lawful it may in substance be laid to the fullest extent by states in which the

goods are sold as well as those in which they are manufactured. Interstate

commerce would thus be subjected to the risk of a double tax burden to which

intrastate commerce is not exposed, and which the commerce clause forbids.9

We have repeatedly held that such a tax is a regulation of, and a burden upon,

interstate commerce prohibited by article 1, section 8, of the Constitution.10

The opinion of the State Supreme Court stresses the generality and

nondiscriminatory character of the exaction but it is settled that this will not

save the tax if it directly burdens interstate commerce.11

11 The State court and the appellees rely strongly upon American Manufacturing

Company v. St. Louis, 250 U.S. 459, 39 S.Ct. 522, 63 L.Ed. 1084, as supporting

the tax on appellant's total gross receipts derived from commerce with citizens

of the State and those of other states or foreign countries. But that case dealt

with a municipal license fee for pursuing the occupation of a manufacturer in

St. Louis. The exaction was not an excise laid upon the taxpayer's sales or upon

the income derived from sales. The tax on the privilege for the ensuing year


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was measured by a percentage of the past year's sales.12 The taxpayer had

during the preceding year removed some of the goods manufactured to a

warehouse in another state and, upon sale, delivered them from the warehouse.

It contended that the city was without power to include these sales in the

measure of the tax for the coming year. The court held, however, that the tax

was upon the privilege of manufacturing within the state and it was permissible

to measure the tax by the sales price of the goods produced rather than by their value at the date of manufacture. If the tax there city consideration had been a

sales tax the city could not have measured it by sales consummated in another

state. That the tax in the present case is not a tax on the manufacture but a tax

on gross sales, is evident from the regulations promulgated pursuant to the Act

and confirmed by an amendment of the state adopted in 1937 under which, if

the appellant had shipped its products to another state and thence sold them (as

did the American Manufacturing Company), the receipts from the sales would

be exempt from the gross income reached by the Act.13

12 So far as the sale price of the goods sold in interstate commerce includes

compensation for a purely intrastate activity, the manufacture of the goods

sold, it may be reached for local taxation by a tax on the privilege of

manufacturing, measured by the value of the goods manufactured,14 or by other

permissible forms of levy upon the intrastate transaction.15 It is because the tax,

forbidden as to interstate commerce, reaches indiscriminately and without

apportionment, the gross compensation for both interstate commerce andintrastate activities that it must fail in its entirety so far as applied t r eceipts

from sales interstate.

13 We hold that, as respects the appellant's sales of its manufactured product in

interstate and foreign commerce, the statute cannot constitutionally be

enforced.

14 2. Will the imposition of the tax in respect of interest on the bonds of Indianamunicipalities violate article 1, section 10, of the Constitution of the United

States?

15 By an Act of March 9, 1903, entitled 'An Act to exempt from taxation all

bonds, notes and other evidences of interest-bearing debt issued by the State or

by municipal corporations,' it was provided: 'That all bonds, notes and other

evidences of indebtedness hereafter issued by the State of Indiana or by

municipal corporations within the State upon which the said State or the said

municipal corporations pay interest shall be exempt from taxation.'16 By an Act

of March 11, 1919, tax laws of the State were codified and the Act of 1903 was

incorporated without change as clause twentieth of section 5 of the


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codification.17 The section has since been amended but the twentieth clause

remained unchanged at the date of the passage of the Gross Income Tax Act of

1933.

16 The appellant insists that the exemption granted in the Acts of 1903 and 1919

constitutes a contract with purchasers of municipal securities the obligation of

which is unconstitutionally impaired by the attempt to tax the interest theyyield. The State replies that the Acts were not intended to create a contract and

did not in fact do so, but that if they did, the covenant did not embrace interest

payable on municipal obligations but only ad valorem taxation upon them.

17 When the exemption laws were adopted the State had no income tax law.

Whatever may have been the background against which the Act of 1903 is to be

construed, its setting, as a portion of the tax codification of 1919, is significant.

The latter deals with two forms of taxation—poll taxes and property taxes. Itembodies a comprehensive scheme of annual assessment of real and personal

property of individuals, partnerships, and corporations, including public

utilities; makes provision for a return by taxpayers of complete inventories of

property and, in the case of corporations, of the excess value of capital stock

and surplus and of the value of franchises or privileges enjoyed; and provides

for assessment by public officials for the purpose of the application of a rate ad

valorem by various public bodies. The statute has nothing to say with respect to

license, occupation, privilege or other excise taxes. In section 25 it providesthat: 'Where bonds or stocks are now or may hereafter be exempted from

taxation, the accrued interest on such bonds or dividends on such stocks shall

be listed and assessed, unless otherwise exempted, without regard to the time

when the same is to be paid.' Thus the legislature distinguished between the

bonds themselves and the interest accrued upon them as separate subjects of

assessment and ad valorem taxation. The Supreme Court of Indiana has

consistently held that exemptions from taxation are not favored but are to be

strictly construed.18

18 In the light of the foregoing facts we are of opinion that the case is controlled

by Hale v. Iowa State Board, 302 U.S. 95, 58 S.Ct. 102, 82 L.Ed. 72. We are

unable, therefore, to hold that the decision of the Supreme Court is plainly

wrong, even upon the assumption that in adopting the statutory exemption the

legislature intended to, and in fact did, contract with purchasers of municipal

bonds.

19 As respects the tax demanded on appellant's gross income from its business in

interstate commerce, the judgment is reversed and, as respects the tax on

interest received from obligations issued by municipalities of the State, the


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judgment is affirmed. The cause will be remanded for further proceedings not

inconsistent with this opinion.

20 So ordered.

21 Reversed in part and affirmed in part.

22 Mr. Justice McREYNOLDS is of opinion that the challenged judgment should

be reversed in toto.

23 Mr. Justice CARDOZO took no part in the consideration or decision of this

case.

24 Mr. Justice BLACK, dissenting, in part.

25 The Indiana statute of 1933 here invalidated imposes 'a tax, measured by the

amount or volume of gross income, * * * upon * * * all residents of the State of

Indiana, and upon the gross income derived from sources within the State of

Indiana, of all persons and * * * companies, * * * who are not residents of * * *

Indiana, but are engaged in business in this state.' Acts Ind.1933, c. 50, § 2. The

tax is general in effect throughout the entire State, applying to all who do

business and who receive annual incomes in the State above $1,000 (withminor exceptions). It falls uniformly upon all such gross incomes whether

derived from interstate or intrastate business or from investments, interest or

services.1 There is no contention that the statute was inspired by any spirit of

antagonism or hostility to interstate commerce or that it discriminates against

interstate commerce in amount or method of application.

26 Concurrently with the passage of this Revenue Act, the Indiana legislature

limited the tax that could be imposed upon other forms of property by the State

or any 'taxing units within the state.'2 The Supreme Court of Indiana in the

opinion below3 said. 'Legislative history indicates that one of the purposes of

the Gross Income Tax Law was to redistribute governmental burdens and

relieve property of a tax burden which was thought to be too great.' Indiana

passed this gross income tax law at a time when depressed economic conditions

were causing the fiscal policies of many States to turn toward similar

legislation.4 Serious financial difficulties of the States stimulated efforts to find

new sources of taxation, andthe widespread belief that property was bearing anunfair burden of taxes also substantially contributed to the levying of these new

taxes.5


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27 Appellant is an Indiana corporation engaged in the business of manufacturing

and selling road machinery. All of the machinery is manufactured in Indiana. Its

office, only plant and all its properties are located in Indiana. Its products are

sold to ultimate purchasers in Indiana and other States by independent

distributors or through sales agents of appellant. All sales must be approved by,

and all payments made to appellant's office in Indiana. While appellant is thus

engaged in interstate commerce, obviously, a major portion of its activitiestakes place in Indiana.

28 The prevailing judgment here is that Indiana cannot constitutionally impose this

tax measured by the gross income received by appellant in Indiana from that

substantial part of its products (manufactured in Indiana) sold to purchasers in

other States. It is held that the tax, thus applied, is prohibited by section 8,

article 1 of the Federal Constitution, which provides that: 'The Congress shall

have Power * * * to regulate Commerce * * * among the several states * * *.'

29 The Indiana tax is not invalidated on the ground that it violates any law passed

by Congress under this constitutional power to regulate interstate commerce.

30 This power to regulate commerce among the States 'like all others vested in

Congress, is complete in itself, may be exercised to its utmost extent, and

acknowledges no limitations, other than are prescribed in the Constitution.'6

31 The question, therefore, is whether—in the absence of regulatory legislation by

Congress condemning state taxes on gross receipts from interstate commerce—

the commerce clause, of itself, prohibits all such state taxes, as 'regulations' of

interstate commerce, even though general, uniform and nondiscriminatory.

32 All state taxes on gross receipts from interstate commerce do not discriminate

against, or impose extraordinary burdens upon, that commerce. Those that donot, do no more than impose a normal burden of government upon that

commerce. On the other hand, some state gross income taxes may be designed

or applied so as seriously to impede the freedom of interstate commerce. If

interstate commerce should be so impeded, Congress might—under its

commerce power—find it 'necessary and proper' to condemn all state taxes on

gross receipts, in order to 'carry into execution' its granted power to regulate

and protect interstate commerce.7 We are not here confronted with such a

congressional enactment. Should the Indiana law, and all state taxes on grossreceipts from interstate commerce, as such—in the absence of such enactment

—be condemned as a regulation of interstate commerce in the constitutional

sense?


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33 'Texation' and 'regulation' are not synonymous; all state, county or city taxes

that affect interstate commerce do not 'regulate' it in the constitutional sense;

unquestionably, taxes can be levied for revenue only. As pointed out by Mr.

Justice Holmes in Galveston, Harrisburg, etc., Railway Co. v. Texas, 210 U.S.

217, 225, 28 S.Ct. 638, 52 L.Ed. 1031, involving a state tax which was not

general but was levied only on gross receipts laid on railroads (page 639): 'It

being once admitted, as of course it must be, that not every law that affectscommerce among the states is a regulation of it in a constitutional sense, nice

distinctions are to be expected.' The majority there found that the tax on

interstate transportation violated the Commerce Clause. The dissent, applying

the similar principle that every gross receipts tax is not necessarily a regulation,

insisted that the particular gross receipts tax involved did not 'attempt to

regulate commerce among the states' and should not 'be taken as a tax on

interstate commerce in the sense of the Constitution; for its operation on

interstate commerce is only incidental, not direct.' Both opinions recognized adistinction between taxes for revenue, which incidentally affect interstate

commerce, and other taxes which directly regulate commerce. More recently,

this Court has said in Western Live Stock v. Bureau of Revenue, 303 U.S. 250,

58 S.Ct. 546, 550, 82 L.Ed. 823: 'Recognizing that not every local law that

affects commerce is a regulation of it in a constitutional sense, this Court has

held that local taxes may be laid on property used in the commerce; that its

value for taxation may include the augmentation attributable to the commerce

in which it is employed; and, finally, that the equivalent of that value may becomputed by a measure related to gross receipts when a tax of the latter is

substituted for a tax of the former.'8

34 Many cases relied on to support the prevailing judgment here hold that state

gross receipts taxes imposed on interstate 'transportation' violate the Commerce

Clause, While this construction of the Commerce Clause had been previously

considered, it was fully clarified and delimited in Philadelphia & S. Mail

Steamship Co. v. Pennsylvania, 122 U.S. 326, 341, 342, 344, 345, 7 S.Ct. 1118,30 L.Ed. 1200, and that decision has served as the authoritative basis for

subsequent decisions (page 1122):

35 'The tax in the present case is laid upon the gross receipts for transportation as

such. Those receipts are followed, and caused to be accounted for by the

company dollar for dollar. It is those specific receipts, or the amount thereof,

(which is the same thing,) for which the company is called upon to pay the tax.

They are taxed, not only because they are money or its value, but because theywere received for transportation. No doubt a ship-owner, like any other citizen,

may be personally taxed for the amount of his property or estate, without

regard to the source from which it was derived, whether from commerce or


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banking or any other employment. But that is an entirely different thing from

laying a special tax upon his receipts in a particular employment. * * *

36 'It (the tax under consideration) is not a general tax on the incomes of all the

inhabitants of the state, but a special tax on transportation companies.

Conceding, however, that an income tax may be imposed on certain classes of

the community, distinguished by the character of their occupations, this is notan income tax on the class to which it refers, but a tax on their receipts for

transportation. * * * It is clearly not such, but a tax on transportation only.'

(Italics supplied.) Previous decisions had held that the Commerce Clause did

not prohibit state taxes on gross receipts from interstate commerce.9 The effect

of these prior decisions was modified by the Philadelphia & S. Mail Steamship

Co. Case. The latter case decided (contrary to the previous decisions) that a

state tax on gross receipts received for actual interstate transportation is

prohibited by the Commerce Clause. In that case the tax invalidated was aselective tax applied to the particular business of transportation. Consequently,

the Court did not decide whether a state could constitutionally impose a general

gross income tax (such as Indiana's) to an interstate business (such as

appellant's) not involving transportation. Crew Levick Co. v. Pennsylvania, 245

U.S. 292, 38 S.Ct. 126, 62 L.Ed. 295, December, 1917, and United States Glue

Co. v. Oak Creek, 247 U.S. 321, 38 S.Ct. 499, 62 L.Ed. 1135, Ann.Cas.1918E,

748, June, 1918, marked the all-inclusive condemnation of state taxes on gross

receipts from interstate commerce, as a class—without regard to discriminationor generality.

37 However, as pointed out in the opinion, (page 127) the 'bare question' in the

Crew Levick Case was 'whether a state tax imposed upon the business of

selling goods in foreign commerce, in so far as it is measured by the gross

receipts from merchandise shipped to foreign countries, is in effect a regulation

of foreign commerce or an impost upon exports, within the meaning of the

pertinent clauses of the Federal Constitution.' The tax there involved was not ageneral income tax bearing uniformly upon all business within the State. When

the opinion in the United States Glue Co. Case—where a gross income tax was

not in issue—indicated approval of an extension of the previous constitutional

rule so as to condemn—as a class—all state taxes on gross receipts from

interstate commerce, the Court clearly set out its reasons for the extension. The

Court said that the distinction (page 501): '* * * between a tax measured by

gross receipts and one measured by net income, recognized by our decisions, is

manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business affected

and a charge that is only indirect and incidental. A tax upon gross receipts

affects each transaction in proportion to its magnitude and irrespective of


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whether it is profitable or otherwise. Conceivably it may be sufficient to make

the difference between profit and loss, or to so diminish the profit as to impede

or discourage the conduct of the commerce. A tax upon the net profits has not

the same deterrent effect, since it does not arise at all unless a gain is shown

over and above expenses and losses, and the tax cannot be heavy unless the

profits are large. Such a tax, when imposed upon net incomes from whatever

source arising, is but a method of distributing the cost of government, like a taxupon property, or upon franchises treated as property; and if there be no

discrimination against interstate commerce, either in the admeasurement of the

tax or in the means adopted for enforcing it, it constitutes one of the ordinary

and general burdens of government, from which persons and corporations

otherwise subject to the jurisdiction of the states are not exempted by the

Federal Constitution because they happen to be engaged in commerce among

the states.'

38 A tax upon property used in interstate commerce, even with an augmented

value due to such use, is not a regulation of commerce, is valid and is within

the powers of the state.10 Yet, the constitutional validity of a tax on property

does not turn upon whether the property is profitable to its owner.Gr oss

receipts from interstate commerce—as from all sources—vary and will

probably rise and fall with property values. Therefore, the total amount exacted

from interstate commerce under a gross receipts tax can fluctuate just as the

total paid under a property tax. Since property and corporate franchises used ininterstate commerce can be constitutionally taxed by States, whether profitable

or unprofitable, it seems difficult to justify a constitutional test for state income

taxes based upon existence or absence of profit.

39 The application of such a constitutional test will—as a practical matter—

inevitably result in exempting all enterprises engaged in interstate commerce

from all state gross income taxes on interstate commerce receipts, whether

profitable or not. At the same time, local intrastate enterprises, doing businessin the same communities, must pay state gross receipts taxes whether profitable

or unprofitable. Such a construction of the Commerce Clause—designed to

prevent a State from imposing unfair tax burdens upon those engaged in

interstate commerce actually serves to impose an unfair and discriminatory

burden upon local intrastate business. Failure of an interstate business to make a

profit does not relieve the State of its burden in affording protection for that

business. While the Federal government is charged with the constitutional duty

of protecting and fostering interstate commerce by proper regulation11 it has notattempted to provide local governmental protection for those engaged in such

commerce. However desirable it may be, as a tax policy, to tax in accordance

with ability to pay, the failure to make a profit should not of itself create a


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constitutional exemption from a tax which the State might otherwise impose.12

And, as a practical matter, state taxing authorities may be moved by the

consideration that profits are not always capable of ascertainment with

complete accuracy and certainty.13

40 It has been suggested, however, that Indiana might by law apportion to itself

that part of a tax on gross receipts from interstate commerce to which it isentitled. Such an apportionment by Indiana woul, in effect, fix the portion of

such a tax for the other forty-seven States which appellant's interstate business

might touch. Indiana has no authority to determine what, how, when or to what

extent other States may tax within their respective boundaries. If such power of

apportionment or allocation exists at all, it must be true that the only repository

of a power touching complex and national aspects of interstate commerce is not

Indiana, not the Judiciary—but the National Congress.

41 Interstate commerce constitutes a large part of the business of the nation. Until

Congress, in the exercise of its plenary power over interstate commerce, fixes a

different policy, it would appear desirable that the States should remain free to

adopt tax systems imposing uniform and nondiscriminatory taxes upon

interstate and intrastate business alike.

42 It also urged that a gross receipts tax under the Commerce Clause is invalid

because it might result in multiple burdens on interstate commerce.14 The

possibility is suggested that the States may use gross income taxes to create

direct, extraordinary, and unjust burdens upon interstate commerce and that this

possibility requires that all state taxes on gross interstate commerce receipts be

condemned as within the prohibition of the Commerce Clause. Congress was

undoubtedly given the exclusive power to regulate commerce in order that

undue, unjust and unfair burdens might not be imposed upon such commerce.15

It was not intended, however, that interstate commerce should enjoy a preferred

status over intrastate business or to remove those engaged in interstatecommerce from the ordinary and usual burdens of the government which

affords such commerce protection.16 A court may act to protect a litigant from

unfair and unjust burdens upon the litigant's interstate business. Yet, it would

seem that only Congress has the power to formulate rules, regulations and laws

to protect interstate commerce from merely possible future unfair burdens. Here

the record does not indicate any charge or proof of an existing extraordinary,

unfair or multiple tax burden on appellant. The tax burden from which

appellant is here exempted is one which the local taxpayers of Indiana must bear. As a result, an unjust and unfair burden is actually imposed upon

intrastate business, because of an apprehension of a possible future injury to

interstate commerce. The control of future conduct, the prevention of future


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injuries and the formulation of regulatory rules in the fields of commerce and

taxation, all present legislative problems.

43 This Court has sustained, and the majority opinion refers approvingly to a

municipal license tax in Missouri, imposed in addition to an ad valorem

property tax, in which the amount of the license was measured by the amount

received for the interstate sale of goods manufactured within themunicipality.17 It is true that the amount of the license for a succeeding year

was there measured by a percentage of the amount of sales for the preceding

year, while the Indiana tax is paid quarterly during the year of sale. However,

if we look to substance and effect, disregard the nominal designation of each

tax, and consider the realities of the two taxes, the tax burdens are identical

under the approved Missouri tax and the disapproved Indiana tax.18 Numerous

other decisions have recognized the principle of including receipts from

interstate commerce in the figure (not wholly derived from such commerce)used in measuring the amount of a state excise tax.19

44 It has been often said that no formula can be devised for determining in all

cases whether or not a state tax is prohibited by the Commerce Clause, and that

'the question is inherently a practical one, depending for its decision on the

special facts of each case * * *.'20 A formula which arbitrarily stamps every

state gross receipts tax as a violation of the Commerce Clause, on the ground

that it can be used for cumulative tax purposes, leaves unanswered the possibility that other taxes, previously held valid, may be used with like effects

on interstate commerce; disregards the fact that in many cases, as here, such a

tax can be fairly and uniformly applied to both interstate and intrastate

commerce; and in effect actually denies a State the privilege of using such a tax

unless willing to impose unjust and unequal burdens upon its own citizens

engaged in intrastate commerce.

45 The receipt of income is a taxable event and need not necessarily enjoy theimmunity of the income's source.21 Appellant's receipt of gross income could be

taxed in one State only, because appellant received income only in Indiana. A

sales tax might possibly be imposed upon independent distributors of

appellant's products who do business in other States. Such tax would be

constitutional only if it did not discriminate against appellant's products.22

Distributors in States other than Indiana do business under the protection of

their respective States. Under these circumstances, nondiscriminatory sales

taxes in those States upon the distributors create no unfair multiplication of taxes and would not be unconstitutional.23 The manufacturer who receives

protection under the laws of Indiana and the distributors who receive protection

under the laws of the States in which products are sold, should be subject to


13/21

uniform, nondiscriminatory taxes imposed by the sovereign power of the States

in which both do business under State protection.

46 Judicial interpretation of the Commerce Clause gradually evolved the principle

that nonaction by Congress is tantamount to a congressional declaration that the

flow of commerce from State to State must be free from unfair and

discriminatory burdens.24 Throughout the decisions upon the question has runrecognition of the supreme power of Congress to regulate interstate commerce,

and the courts have stricken down state taxes when found to raise barriers

impeding the free flow of commerce between the States, but not obstructing

commerce between citizens within a single State. Courts—in the absence of

congressional regulation of interstate commerce—have acted because there '* *

* would otherwise be no security against conflicting regulations of different

States, each discriminating in favor of its own products and citizens, and against

the products and citizens of other States. * * * it is a matter of public historythat the object of vesting in Congress the right to regulate commerce with

foreign nations and among the States was to insure uniformity of regulation

against conflicting and discriminating State legislation.'25 With reference to

borderline laws, it has been significantly pointed out that there '* * * is also, in

addition to the restraint which those provisions (the Commerce Clause) impose

by their own force on the State, the unquestioned power of Congress, under the

authority to regulate commerce among the States, to interpose, by the exercise

of this power, in such a manner as to prevent the State from any oppressiveinterference with the free interchange of commodities by the citizens of one

State with those of another.'26

47 If it be true, as urged, that some state gross receipts taxes may possibly in the

future be multiplied so as to burden interstate commerce unfairly, it is equally

true that other state gross receipts taxes (as the Indiana tax) may not, in the

absence of such multiplication, result in such burdens. Since the present

litigation has developed that no such unfair burdens have been imposed uponappellant's interstate business, appellant can only be exempted from payment of

this tax by application of a regulatory rule or law which condemns all such state

taxes—whether fair or unfair. If such a general rule or law is to be promulgated

it would seem that under our constitutional division of governmental powers

such a regulatory policy should be considered and determined by Congress

under its exclusive grant. It will be time enough for judicial protection when a

litigant actually proves, in a particular case, that state gross receipts taxes levied

against the litigant have resulted in unfai a nd unjust discrimination against thelitigant because of engagement in interstate commerce. Many arguments—

which we might believe to be sound—can be advanced against the legislative

policy of a gross receipts tax. These objections, however, are not the criterion


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Indiana Acts 1933, c. 50, Ind.Stat.Ann., Burns', § 64-2601 et seq.

7 N.E.2d 941, 944.

Compare Miles v. Department of Treasury, 209 Ind. 172, 188, 199 N.E. 372,

379, 101 A.L.R. 1359.

Compare Matson Navigation Co. v. State Board, 297 U.S. 441, 444, 56 S.Ct.

553, 554, 80 L.Ed. 791.

Compare American Manufacturing Co. v. St. Louis, 250 U.S. 459, 39 S.Ct.

522, 63 L.Ed. 1084; Oliver Iron Mining Co. v. Lord, 262 U.S. 172, 43 S.Ct.

526, 67 L.Ed. 929; Hope Natural Gas Co. v. Hall, 274 U.S. 284, 47 S.Ct. 639,

71 L.Ed. 1049; Utah Power & Light Co. v. Pfost, 286 U.S. 165, 52 S.Ct. 548,76 L.Ed. 1038.

Compare Postal Telegraph Cable Co. v. Adams, 155 U.S. 688, 15 S.Ct. 268,

360, 39 L.Ed. 311; United States Express Co. v. Minnesota, 223 U.S. 335, 32

S.Ct. 211, 56 L.Ed. 459; Pullman Co. v. Richardson, 261 U.S. 330, 43 S.Ct.

366, 67 L.Ed. 682.

Indiana Acts of 1932, Sp.Sess. c. 10, p. 17.

Article 2 of the Regulations states 'The gross income tax of 1933 is primarily

and in effect a gross receipts tax * * *.' Article 16 states that the 'tax shall apply

to and be levied and collected upon all gross income received * * *.'

See Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82

L.Ed. 823.

Cook v. Pennsylvania, 97 U.S. 566, 24 L.Ed. 1015; Fargo v. Michigan, 121

U.S. 230, 7 S.Ct. 857, 30 L.Ed. 888; Philadelphia & Southern Mail S.S. Co. v.

Pennsylvania, 122 U.S. 326, 7 S.Ct. 1118, 30 L.Ed. 1200; Galveston, etc., Ry.

Co. v. Texas, 210 U.S. 217, 28 S.Ct. 638, 52 L.Ed. 1031; Meyer v. Wells Fargo

of its constitutionality. With the wisdom of such fiscal policy of a State we are

not concerned.27 The interests of interstate commerce will best be fostered,

preserved and protected—in the absence of direct regulation by the Congress—

by leaving those engaged in it in the various States subject to the ordinary and

nondiscriminatory taxes of the States from which they receive governmental

protection. For these reasons I believe that the entire judgment of the court

below should be affirmed.

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& Co., 223 U.S. 298, 32 S.Ct. 218, 56 L.Ed. 445; The Minnesota Rate Cases,

230 U.S. 352, 400, 33 S.Ct. 729, 57 L.Ed. 1511, 48 L.R.A.,N.S., 1151,

Ann.Cas.1916A, 18; Crew Levick Co. v. Pennsylvania, 245 U.S. 292, 38 S.Ct.

126, 62 L.Ed. 295; United States Glue Co. v. Oak Creek, 247 U.S. 321, 328, 38

S.Ct. 499, 62 L.Ed. 1135, Ann.Cas.1918E, 748; New Jersey Bell Telph one Co.

v. State Board of Taxes & Assessment, 280 U.S. 338, 349, 50 S.Ct. 111, 114,

74 L.Ed. 463; Fisher's Blend Station v. State Tax Commission, 297 U.S. 650,655, 56 S.Ct. 608, 610, 80 L.Ed. 956; Puget Sound Stevedoring Co. v. State

Tax Commission, 302 U.S. 90, 58 S.Ct. 72, 82 L.Ed. 68; Western Live Stock v.

Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823.

Crew Levick Co. v. Pennsylvania, 245 U.S. 292, 38 S.Ct. 126, 62 L.Ed. 295;

Spalding & Bros. v. Edwards, 262 U.S. 66, 69, 43 S.Ct. 485, 486, 67 L.Ed. 865;

Cooney v. Mountain States Tel. & Teleg. Co., 294 U.S. 384, 393, 55 S.Ct. 477,

482, 79 L.Ed. 934.

Compare Bass, Ratcliff & Gretton v. State Tax Comm., 266 U.S. 271, 280, 45

S.Ct. 82, 69 L.Ed. 282; Educational Films Corp. v. Ward, 282 U.S. 379, 387,

388, 51 S.Ct. 170, 171, 75 L.Ed. 400, 71 A.L.R. 1226.

Regulations 193(4) 'Persons resident and/or domiciled in Indiana who are

engaged in business, the legal situs and location of which is in states other than

Indiana, and the activities of such business are carried on in states other than

Indiana, will not be required to pay tax upon the gross receipts therefrom.'

Acts of Indiana 1937, c. 117, § 1, p. 609: 'That with respect to individuals

resident in Indiana and corporations incorporated under the laws of Indiana

authorized to do and doing business in any other state and/or foreign country,

the term 'gross income' shall not include gross receipts received from sources

outside the State of Indiana in cases where such gross receipts are received

from a trade or business situated and regularly carried on at a legal situs outside

the State of Indiana, or from activities incident thereto * * *.'

Oliver Iron Mining Co. v. Lord, 262 U.S. 172, 43 S.Ct. 526, 67 L.Ed. 929;

Hope Natural Gas Co. v. Hall, 274 U.S. 284, 47 S.Ct. 639, 71 L.Ed. 1049;

American Mfg. Co. v. St. Louis, supra.

Utah Power & Light Co. v. Pfost, 286 U.S. 165, 52 S.Ct. 548, 76 L.Ed. 1038;

Federal Compress & Warehouse Co. v. McLean, 291 U.S. 17, 54 S.Ct. 267, 78

L.Ed. 622; Chassaniol v. Greenwood, 291 U.S. 584, 54 S.Ct. 541, 78 L.Ed.

1004.

Acts of Indiana 1903, c. 179, p. 322.

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Acts of Indiana 1919, c. 59, § 5 (twentieth), p. 203.

South Bend v. University of Notre Dame Du Lac, 69 Ind. 344, 348; Read v.

Yeager, 104 Ind. 195, 199, 3 N.E. 856.

The generality of this tax is made clear in its definition of gross income as

including, with minor exceptions, 'the gross receipts of the taxpayer received ascompensation for personal services, and the gross receipts of the taxpayer

derived from trades, businesses or commerce, and the gross receipts proceeding

or accruing from the sale of property, tangible or intangible, real or personal, or

service, or any or all of the foregoing, and all receipts by reason of the

investment of capital, including interest, discount, rentals, royalties, fees,

commissions or other emoluments, however designated * * *.' Section 1(f),

chapter 50, Indiana Acts 1933.

Acts of Indiana 1933, p. 1085, Act approved March 9, 1933. The Gross IncomeTax Law was approved February 27, 1933, Acts 1933, Indiana, c. 50, 78th

Sess., p. 388.

7 N.E.2d 941, 945.

'The obtaining of funds to replenish impoverished treasuries was the principal

goal of the state legislatures in 1933. Relief to property also was a much sought

after end. Property relief was accorded through reduced appropriations,lowered tax limits, and collection leniency. The drive for new revenue resulted

in the adoption of gross income or gross sales taxes in fifteen states. * * *

'The development of the gross income or gross sales taxes is probably the

outstanding tax news of the year.' The Tax Magazine, Vol. 12, February, 1934,

page 63, 'State Tax Legislation, 93 3,' Raymond E. Manning. Id., see page 365,

'Chart of State Sales, Gross Income, and License Taxes.'

'Indiana's fiscal strain was not to be found in the state government until the

$1.50 property tax limitation adopted by the legislature in 1932 cut almost in

half the state rate on property, which had been furnishing not far from one-

fourth of total state revenues (including motor vehicle taxes). Coupled with a

drastic shrinkage in assessed valuations and a demand for increased state aid to

localities, this made it imperative for the state government to seek new revenue

sources even though the other tax yields had been holding up fairly well

through 1931—32. * * *

'It is evident that the local tax situation was the chief factor bringing about the

sweeping change in the state's own system. For one not intimately acquainted

with conditions in Indiana it is not easy to locate from the available data the

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precise sources of trouble, but whatever they may have been, the tax limitation

law crystallized them, and the result is a threatened breakdown of

governmental finance in many localities, unless the state succeeds in carrying

out its greatly increased program of aid to localities through highway and

school moneys. * * *

'The campaign in support of the (gross receipts) tax * * * was led by theIndiana Farm Bureau, which secured the signatures of a large number of

farmers on a petition urging the passage of a sales tax. On February 12 a

meeting of farmers and other property owners was held, and several thousand

marched to the capitol. For several years the bureau had been urging the

reduction of property taxes, and partly as a result of its efforts the $1.50 law

was passed in the special session of 1932, limiting the state levy to 15 cents and

all local levies to $1.35 per $100 of assessed value. * * *

'The Indianapolis Real Estate Board, in addition to cooperating with the Indiana

Farm Bureau, worked with the Indiana Real Estate Association and the

Federation of Community Civic Clubs. A meeting of all these organizations,

held on February 10, 1933, passed resolutions favoring the sales tax.'

'The Sales Tax in the American States,' Haig and Shoup, (1934, Columbia

University Press), 238, 241, 242.

Cf. Gibbons v. Ogden, 9 Wheat. 1, 196, 197, 6 L.Ed. 23. Since Congress hasnot acted upon this subject, the present case does not involve a manifestation by

Congress of its paramount and exclusive authority to regulate an aspect of

interstate commerce with which the states may deal (because of its local nature)

until Congress acts. Cf., New York C. & H.R. Co. v B oard of Chosen

Freeholders of County of Hudson, 227 U.S. 248, 35 S.Ct. 269, 57 L.Ed. 499.

Cf., Houston, E. & W. Texas R. Co. v. United States, The Shreveport Case, 234

U.S. 342, 350 et seq., 34 S.Ct. 833, 58 L.Ed. 1341.

'* * * the bare fact that one is carrying on interstate commerce does not relieve

him from many forms of state taxation which add to the cost of his business. He

is subject to a property tax on the instruments employed in the commerce * * *

and if the property devoted to interstate transportation is used both within and

without the state, a tax fairly apportioned to its use within the state will be

sustained * * *. Net earnings from interstate commerce are subject to income

tax * * * and, if the commerce is carried on by a corporation, a franchise tax

may be imposed, measured by the net income from business done within the

state, including suc p ortion of the income derived from interstate commerce as

may be justly attributable to business done within the state by a fair method of

apportionment. * * * All of these taxes in one way or another add to the

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expense of carrying on interstate commerce, and in that sense burden it; but

they are not for that reason prohibited.' Western Live Stock v. Bureau of

Revenue, 303 U.S. 250, 58 S.Ct. 546, 548, 82 L.Ed. 823.

'* * * it is not everything that affects commerce that amounts to a regulation of

it, within the meaning of the Constitution. * * *

'* * * we think it may safely be laid down that the gross receipts of railroad or

canal companies, after they have reached the treasury of the carriers, though

they may have been derived in part from transportation of freight between

States, have become subject to legitimate taxation. It is not denied that net

earnings of such corporations are taxable by State authority without any inquiry

after their sources, and it is difficult to state any well-founded distinction

between the lawfulness of a tax upon them and that of a tax upon gross receipts,

or between the effects the w ork upon commerce, except perhaps in degree.'

State Tax on Railway Gross Receipts, 15 Wall. 284, 293, 296, 21 L.Ed. 164.

'The tax (State Tax on Railway Gross Receipts, 15 Wall. 284, 21 L.Ed. 164) on

gross receipts was held not to be repugnant to the Constitution, because

imposed on the railroad companies in the nature of a general income tax, and

incapable of being transferred as a burden upon the property carried from one

State to another. * * *

'* * * It is as important to leave the rightful powers of the State in respect totaxation unimpaired as to maintain the powers of the Federal government in

their integrity.

'In the second of the cases recently decided (State Tax on Railway Gross

Receipts, 15 Wall. 284, 21 L.Ed. 164) the whole court agreed that a tax on

business carried on within the State and without discrimination between its

citizens and the citizens of other States, might be constitutionally imposed and

collected. * * *

'It is to be observed that Congress has never undertaken to exercise this power

in any manner inconsistent with the municipal ordinance under consideration,

and there are several cases in which the court has asserted the right of the State

to legislate, in the absence of legislation by Congress, upon subjects over which

the Constitution has clothed that body with legislative authority.' Osborne v.

Mobile, 16 Wall. 479, 481, 482, 21 L.Ed. 470.

Cf., Cudahy Packing Company v. State of Minnesota, 246 U.S. 450, 453, 454,38 S.Ct. 373, 62 L.Ed. 827; United States Express Co. v. Minnesota, 223 U.S.

335, 345, 347, 32 S.Ct. 211, 56 L.Ed. 459.

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Dayton-Goose Creek Railway Co. v. United States, 263 U.S. 456, 478, 44 S.Ct.

169, 172, 68 L.Ed. 388, 33 A.L.R. 472.

State Railroad Tax Cases, 92 U.S. 575, 606, 23 L.Ed. 663; cf., Ohio Tax Cases,

232 U.S. 576, 590, 34 S.Ct. 372, 58 L.Ed. 737.

Cf., with reference to a state tax law assailed as violative of the FourteenthAmendment, dissent of Mr. Justice Cardozo: 'But profits themselves are not

susceptible of ascertainment with certainty and precision except as the result of

inquiries too minute to be practicable. The returns of the taxpayer call for an

exercise of judgment as well as for a transcript of the figures on his books. They

are subject to possible inaccuracies, almost without number. Salaries of

superintendence, figuring as expenses, may have been swollen inordinately;

appraisals of plant, of merchandise, of patents, of what not, may be erroneous or

even fraudulent. In the words of a student of the problem, 'statements of profits

are affected both by accounting methods and by the optimistic or pessimistic

light in which the future is viewed at the time when the accounts are made up.'

* * * These difficulties and dangers bear witness to the misfortune of forcing

methods of taxation within a Procrustean formula. If the state discerns in

business operations uniformities and averages that seem to point the way to a

system easier to administer than one based upon a report of profits, and yet

likely in the long run to work out approximate equality, it ought not to be

denied the power to frame its laws accordingly.' Stewart Dry Goods Co. v.

Lewis, 294 U.S. 550, 576, 577, 55 S.Ct. 525, 536, 79 L.Ed. 1054.

See, Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82

L.Ed. 823.

Philadelphia & S. Mail Steamship Co. v. Pennsylvania, 122 U.S. 326, 346, 7

S.Ct. 1118, 30 L.Ed. 1200.

See, Woodruff v. Parham, 8 Wall. 123, 137, 19 L.Ed. 382.

American Mfg. Co. v. St. Louis, 250 U.S. 459, 39 S.Ct. 522, 63 L.Ed. 1084.

Apparently, if the Indiana tax had been 'on the privilege of manufacturing,

measured by the total gros r eceipts from sales of the manufactured goods, both

intrastate and interstate' instead of designated as 'a tax, measured by the amount

or volume of gross income' received from manufacturing and sales interstate

and intrastate, the tax would be held valid. See, Western Live Stock v. Bureau

of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823.

Hump Hairpin Co. v. Emmerson, 258 U.S. 290, 294, 42 S.Ct. 305, 307, 66

L.Ed. 622; Maine v. Grand Trunk Railway Co., 142 U.S. 217, 12 S.Ct. 121,

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163, 35 L.Ed. 994; Wisconsin & Michigan Railway Co. v. Powers, 191 U.S.

379, 24 S.Ct. 107, 48 L.Ed. 229; United States Express Co. v. Minnesota, 223

U.S. 335, 343, 32 S.Ct. 211, 56 L.Ed. 459.

Hump Hairpin Co. v. Emmerson, supra, at page 295, 42 S.Ct. at page 307.

In sustaining an income tax law of the State of New York against a challengethat it violated the Fourteenth Amendment, it was said: 'That the receipt of

income by a resident of the territory of a taxing sovereignty is a taxable event is

universally recognized. Domicil itself affords a basis for such taxation.

Enjoyment of the privileges of residence in the state and the attendant right to

invoke the protection of its laws are inseparable from responsibility for sharing

the costs of government. 'Taxes are what we pay for civilized society.' * * *

Neither the privilege nor the burden is affected by the character of the source

from which the income is derived. For that reason income is not necessarily

clothed with the tax immunity enjoyed by its source. * * * It may tax net

income from operations in interstate commerce, although a tax on the

commerce is forbidden, United States Glue Co. v. Oak Creek, 247 U.S. 321, 38

S.Ct. 499, 62 L.Ed. 1135, Ann.Cas. 1918E, 748; Shaffer v. Carter, supra, (252

U.S. 37, 50, 40 S.Ct. 221, 224, 64 L.Ed. 445).' New York ex rel. Cohn v.

Graves, 300 U.S. 308, 312, 313, 57 S.Ct. 466, 467, 81 L.Ed. 668, 108 A.L.R.

721. The dissent called attention to the fact that not only was the New York

taxpayer subject to an income tax in that State by the decision b ut that 'New

Jersey, in addition to tax on the land measured by its value, may lay a tax uponthe income received by the owner for its use.' At page 318, 57 S.Ct. at page

470.

"A state tax upon merchandise brought in from another state or upon its sales,

whether in original packages or not, after it has reached its destination and is in

a state of rest, is lawful only when the tax is not discriminating in its incidence

against the merchandise because of its origin in another state.' Sonneborn Bros.

v. Cureton, (262 U.S. 506) at page 516, 43 S.Ct. 643, 646 (67 L.Ed. 1095). * ** Neither the power to tax nor the police power may be used by the state of

destination with the aim and effect of establishing an economic barrier against

competition with the products of another state or the labor of its residents. * * *

They are thus hostile in conception as well as burdensome in result. The form

of the packages in such circumstances is immaterial, whether they are original

or broken.' Baldwin v. G.A.F. Sellig, 294 U.S. 511, 526, 527, 55 S.Ct. 497, 502,

79 L.Ed. 1032, 101 A.L.R. 55. (Italics supplied.)

Sonneborn Bros. v. Cureton, 262 U.S. 506, 43 S.Ct. 643, 67 L.Ed. 1095.

See, Philadelphia & S. Mail Steamship Co. v. Pennsylvania, supra.

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County of Mobile v. Kimball, 102 U.S. 691, 697, 26 L.Ed. 238.

Woodruff v. Parham, 8 Wall. 123, 140, 19 L.Ed. 382.

Cf. Purity Extract & Tonic Co. v. Lynch, 226 U.S. 192, 33 S.Ct. 44, 57 L.Ed.

184.

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JD Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938)

Documents

Transcript of JD Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938)